You don't need to outsmart the experts. Just be smart enough to have a 'best-fit' strategy

Passive forms of investment management — using index funds to represent broad segments of global markets for stocks and bonds — are rapidly gaining favor for two reasons compared to active management approaches that try to pick just the winners and outperform the index.

One reason is intuitive and simple to understand. The other is counter-intuitive and some people choose not to believe it.

The most obvious reason is cost. The average actively managed mutual fund charges annual management fees of about 0.80 percent of invested money. For every $10,000 invested, $80 is netted out of the investment’s return to pay the manager.

Many passive funds provide a diversified investment for a fee of less than 0.10 percent — one-eighth the cost with no decrease in expected return. When the difference in price shows up directly in performance, it can be difficult for active managers to outperform after fees.

But fees are not the sole reason active managers struggle to generate performance worth paying extra for.

Another less intuitive reason is that the marketplace has increasingly become saturated with exceptionally well-educated investors harnessing extraordinary computational power to monitor, evaluate and execute transactions.

That’s right, the more talented people following prudent processes and disciplined investment systems, the worse the collective performance becomes.

While the overall skill of investors in the marketplace increases, the ability for those skilled investors to standout is further reduced because the competition is so broadly talented. Ability to generate excess returns is diluted when more quality participants chase limited opportunities.

The Chartered Financial Analyst (CFA) credential is the most respected measure of investment acumen. There currently are 155,000 CFAs worldwide. But 227,031 people recently tested at one of the three levels of the program. Imagine if half of them became CFAs. (It’s a grueling, three-year process with a high failure rate.) There would be 75 percent more CFA charterholders in the next three years than there have been granted since the program started in 1965.

Every investment management company, mutual fund firm, pension manager or consultant, has CFAs on staff. This is a subset of who you are up against when you decide you can pick winning investments rather than just buy the market and be happy with the index averages.

Certainly, there are non-CFAs who are successful investors. They also have advanced insight into markets, economies and investor behavior.

As an individual investor, buying and selling on your own or with the guidance of a broker, think about the competitive marketplace. Not everyone wins. There is a buyer and a seller involved in every transaction. At every price a share of stock is bought with visions of growth, someone else is willing to sell for lack of a compelling reason to hold it.

The great majority of the buying and selling of investments serves only the purpose of paying the facilitator of the transaction. Since 1926, only 4 percent of all the U.S. publicly traded stocks have generated all the market return, according to Arizona State University finance professor Hendrik Bessembinder.

Because of the increased competition and application of computer-driven, quantitative trading models, few investment managers can persistently add value. Those who have spurts of attention-getting performance often achieved it either through luck or, more fraught with future malady, they took more risk.

Excess risk regularly ends badly, especially for investors who have a different understanding of what risk means than the fund manager.

The ever-sophisticated global investment landscape is creating a shift in the type of financial guidance that is most useful to the most people. Rather than deep analytics of the merits of investing in any particular company’s stock, bonds or other form of investment, what more people need is the breadth of a holistic financial plan to manage key decision points and life transitions with intent and purpose.

You don’t need peerless analysis to find investments that will outperform for your financial plan to work. You just need to determine a “best-fit” mix of stocks and bonds for your goals, time horizon and risk tolerance and let that strategy achieve its market return over time.

With a prudent, even boring, investment strategy, your pursuit of financial security can focus on a plan that provides a foundation to make decisions from and flexibility for “what if?” possibilities.

Rather than spending your time in search of investment ideas you hope will launch your financial standing on a new trajectory, invest your attention instead in defining your needs, wants and wishes for your future. Understand what commitments you need to make to achieve this vision and be disciplined when fear and greed tempt you.

This will increase the likelihood you will achieve your definition of financial security without the need for luck or excess risk.